Inside Asian Gaming

INSIDE ASIAN GAMING | November 2011 10 Cover Story market outlook. Lest we forget, it’s the junkets that are shouldering the VIP credit risk on behalf of the Macau casinos and investors in the first place. Whether the junket is using a revenue share or commission model, it is operating on small margins, needs to maintain cage liquidity and constantly has to guard against the risk of non-performance on its issued credit. With the commission model, the junkets may get to keep as little as 0.35% net commission out of 1.25% rolling chip commission they earn from casinos—with much of the rest being rebated to the junkets’ players to incentivise them to keep playing. Given the slim margins on VIP (albeit high volumes), if a debt or series of debts goes bad it’s not the casino that will go bust—it’s the junket or sub-junket. The junkets aren’t supported and subsidised by the mass-market and other revenue streams such as retail and entertainment in the way that the casinos are. Might some people have an active interest in talking the Macau VIP market and the general Macau market down—despite its stratospheric growth in recent years?Well, yes they might. The diversified ownership of the casino operating companies in Macau via public offerings means there are investors with competing and sometimes contradictory business strategies. As one observer of Macau stocks put it to IAG : “You have so many different styles of money invested in these names. Understanding the market would certainly be easier if investors only focused on ‘What is Macau going to look like in five or ten years from now? “You have so many fast money types— the hedge fund types—that are literally whipping these stocks around day-to- day; trading on rumours that an obscure Chinese-language tabloid in HK publishes a story that over a recent weekend Macau junket rooms were empty—even though they weren’t—people are going to see that and the rumour mill is going to start whirling. The next thing you know these stocks are down 5% or 10% on the day. These people feast on that. But the same people that might have been selling these names hardcore are then buying them right back—looking to play them up and down every day. That’s just a style of investing.” Macau junkets are legally licensed by the Macau government, but they are engaged in at best a grey area of business in China. This is the granting of credit for gambling and the subsequent exportingof Chinese currency— well in excess of the Rmb20,000 per person per trip minimum officially allowed by the Chinese government—in order to cover any losses incurred by players. The fact that nowadays this trade is most likely to be done via methods familiar to financial services companies—such as getting a lien [legally enforceable claim] on a player’s personal assets back in China—rather than the more primitive blue collar methods associated with the Macau junket trade during the STDM monopoly years (such as a home visit by heavies) doesn’t make the process any less opaque. Let’s assume for a moment that the bears/short-term money people are right to be concerned about the state of VIP credit in Macau. Would we get any advanced warning if there were a disorderly unwinding of VIP credit? A potential canary in the coalmine could be if one of the operators widely rumoured in Macau to be ‘buying’ its VIP business—by offering aggressively high levels of revenue share relative to competitors—has a bad quarter in VIP unrelatedtotheusualbaccaratholdvolatility. The assumption behind that thought is that any bad debt registered that quarter would show up in the property’s rolling numbers. That may be a false assumption. There have been rumours in the industry circulating for many months that one of the Macau operators has a packet of badVIP debt dating back several years that has so far been kept off the operator’s books. Ultimately, it may never rear its ugly head on the operator’s balance sheet. There’s a suggestion in the past few weeks that some form of mutual write downs between the operator and the junkets concerned may serve in effect to cancel out the debt. Presumably the tax on the gross has already been paid to theMacau government even if the junket and casino never collected on the principal loaned. Essentially, Macau investors and casino operators have a hard choice. They can either have an opaquely-managed junket system with huge volumes of player roll; or they can have a transparently-managed junket system with only direct players, the risk managed by the casinos and much smaller levels of roll. But unless things change rapidly in China regarding cross- border currency management, they can’t have Singapore’s system of high rolling volumes on casino-issued credit. Grey area—Macau’s VIP junkets prefer to blend into the background